The Council of Bars and Law Societies of the European Union fears that the EU Commission’s Third Directive on Money Laundering will undermine the confidential relationship between a lawyer and his client.

The directive also seeks to regulate the way that the relationship is established and impose an obligation in certain circumstances to terminate the relationship and alert regulatory authorities.

The EU’s proposal is being pushed through the EU Parliament, its passage eased by the need to appear to support action against terrorist financing. However, anxiety is increasing that the directive not only infringes basic human rights but imposes excessive burdens on financial institutions in verifying the probity of their clients.

Banks will be required to create comprehensive worldwide registers of so-called “politically exposed persons” (PEP) with a view to excluding or monitoring their business.

The directive’s definition of a PEP is sweeping and brings into the net non-nationals “who are or who have been entrusted with prominent public functions” as well as their close family members and close associates.

This new addition to the “know your customer” rule is causing alarm among bankers. The British Bankers’ Association has raised its concern with HM Treasury and Jeremy Thorp, a BBA director, fears the banks are being asked to fund an expensive wild goose chase.

“How are you to establish whether someone is politically exposed? It is one thing to ask whether someone is on a UN sanctions list but how do you define ‘close associate’,”he said.

In August, the Belgian Bar mounted a legal challenge to a previous EU directive on money laundering, which came into force in 2001, asking the Belgian constitutional court whether the directive violates the principles of independence and professional secrecy of lawyers.

The EU’s latest directive on money laundering, the third of its kind, raises the ante further, requiring those caught in its web to notify the authorities not just where they are aware of illegal transactions but where they “suspect or have reasonable grounds to suspect [money laundering by their client]”.

In addition, the directive bars a lawyer from telling his client that he is being investigated and bars a lawyer from acting without conducting extensive prior due diligence, a restraint to which the Council of Bars strongly rejects. “Under no circumstances should the state dictate for whom a lawyer may or may not act,” the Council said.

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